Someone needs to let the folks in Raleigh know we're in a down economy still. While much of the tech market lingers in the doldrums, Red Hat announced another strong earnings report for its fiscal third quarter 2010.
Here are some of the headline numbers:
- Revenue of $194 million, an 18 percent increase year-over-year.
- Subscription revenue topped $164 million, up 21 percent year-over-year (and 85 percent of the company's revenue).
- Deferred revenue climbed 23 percent year-over-year to hit $619 million.
- All 25 accounts up for renewal in the quarter renewed, and at 120 percent of value.
Small wonder, then, that the company elected to repurchase 1.9 million shares of common stock for $52.3 million.
While Red Hat's revenue growth rate has been sliding for some time, as The 451 Group has detailed, Red Hat's prospects remain bright. Piper Jaffray, for example, recently highlighted a range of factors contributing to its "Overweight" rating on Red Hat's stock:
Recent conversations with 40 Red Hat industry contacts point to an improved operating environment, an ongoing acceleration in the pace of Unix-to-Linux migrations, and Q3 results essentially inline with plan. We continue to see longer term catalysts for outperformance based upon the recently introduced virtualization products (RHEV), upsell to the premium priced Advanced Platform, adoption of cloud computing, and broadening awareness of open source offerings
In my own conversations with Red Hat executives, it's clear that the company has plenty of headroom in both its JBoss business (8 of the top 25 deals in the quarter included a JBoss component, and Red Hat CFO Charlie Peters said that it continues to grow faster than Red Hat's core RHEL business), but particularly in its virtualization strategy. Virtualization is effectively a way for Red Hat to sell much more deeply into existing accounts. Much deeper.
But Red Hat is also seeing traction in its nascent cloud-computing initiative. In the third quarter, Red Hat saw a major movie studio building a private cloud with its technology in addition to NTT choosing Red Hat for its cloud infrastructure, plus the signing of a six-figure Red Hat Enterprise Linux-based cloud deal.
Clearly, there is gold in the Linux hills for Red Hat, gold that doesn't seem to be running out, especially as Red Hat improves its ability to get free-riders (CentOS and unpaid RHEL users) to pay, as it did this quarter with two sizable "free-to-paid" deals. The only negative in Red Hat's quarter seems to be a back-loading of revenue, meaning that more deals closed at the end of the quarter than normal.
But Peters said that cash flow for the year would come in at the high end of his former guidance, so things remain on track.
In light of Red Hat's strong performance in its core Linux business, it's somewhat strange to see Novell reorganizing to emphasize its proprietary products instead of hitting hard on its still-solid Linux business.
But perhaps there's only room for one Linux vendor in the data center. Based on the last several years of Red Hat performance, that vendor appears to be Red Hat.